Investors see devil in the details, say angel tax exemption will not benefit several startups

NEW DELHI: The government’s much-lauded decision to repeal the controversial 'angel tax' will not benefit several startups because of the riders attached in the new regulation, industry leaders said.

'Angel tax', or tax on investments in startups, was considered regressive by all quarters and seen as one of the prime reasons for exodus of startups and intellectual property from the country.

Leaders in the startup ecosystem say it will continue to hound many firms because, as per the new norms, only firms classified as startups under the new government regulations will be eligible for the tax exemption or other taxation-related benefits.

Startups would need to get a certificate from the Inter-ministerial Board of Certification to get the 'startup' stamp, thereby fulfilling criteria such as not more than five-year old company, turnover not exceeding Rs 25 crore, working towards innovation and commercialisation of new products or services, and driven by technology or intellectual property.

There aren't many startups that have gone for this certification yet.

Also, the new regulation will not apply to retrospective investments and they will still be questioned by tax authorities.

Saurabh Srivastava, cofounder of Indian Angel Network, which has been holding discussions with the government, is not too happy about the new policy.

"It will definitely have a positive impact but it is not a complete but a partial solution," he said. "For all angel investments that were made in the last few years ever since the Section 56 came into being, the startups and angel investors are today being harassed by income-tax authorities which have opened up their investment records. This is not a good scenario and is upsetting angels," he said.

Srivastava is still pursuing the government to find a way to certify angel groups so that investments made through them can be exempt from taxation. "This will be the next logical step and would solve 99 per cent of the problem," he said.

Until now, as per the regulation that came up last year, market regulator Securities and Exchange Board of India (Sebi) has created a new category for 'angel funds', which angel groups could be converted to, and investments made from such funds would not be taxed.

Many angel investors feel the new measure should have been applicable retrospectively.

"I am very, very relieved, though not thankful since correcting something that was fundamentally wrong should not be celebrated," said Anupam Mittal, CEO of Shaadi.com, who is an angel investor with investment in companies such as Ola. "Also, since this step is necessarily a correction, so it should have been applicable retrospectively as well for investments that were made after the rule came into effect," he said.

Mittal also said riders such as the rule being applied only to government-approved startups will lead to red tape and bureaucratic layers in the process of angel investments.

Under the so-called 'angel tax', introduced in the Finance Act 2012, capital raised by an unlisted company from any individual against an issue of shares in excess of fair market value would be taxable as 'income from other sources' under Sec 56 (2) of the I-T Act.

It meant that startups were liable to pay up to 33 per cent tax on any investments received. Data suggests that while venture funding this year has significantly slowed, angel funding has been on a rise. Despite of all regressive taxation schemes, angel investments have not slowed down partly because, according to industry insiders, when the regulation came in everybody thought it was irrational and would go away soon.